The Impact of Offshoring Strategies on Firm Performance: How do Innovation...


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Title The Impact of Offshoring Strategies on Firm Performance: How do Innovation Absorptive Capacity and Firm Size Matter?
Period 09 / 2006 - 01 / 2011
Status Completed
Dissertation Yes
Research number OND1324762
Data Supplier Website ERIM


Recent findings of the Offshoring Research Network show that offshoring of knowledge intensive activities of European and US firms is increasing (Couto, Mani, Lewin, & Peeters, 2006). Offshoring of higher added value activities like R&D, HRM and administrative processes, pose important challenges to companies, e.g. with regard to coordination, control and innovative performance (Levy, 2005). However, access to resources and entrepreneurial motives are gaining importance (Farrell, 2005; Levy, 2005). Additionally, the data show indicative evidence that small and medium sized enterprises (SMEs) act different than large companies in offshoring; in particular with respect to offshoring drivers this study investigates to what extent and why this is the case. Offshoring might be a new international strategy and business model for SMEs to extend their activities. Increased global connectedness (e.g. Audretsch, 1995; Farrell, 2005) offers unique possibilities for companies, but also poses challenges; market transparency increases, customers globalize, industry boundaries blur, technological developments speed up. Next to environmental selection forces, the firm s idiosyncratic strategy is important. This touches upon a debate about how business performance is determined, either by strategic choice of the firm itself (Aldrich & Pfeffer, 1976; Child, 1972, , 1997) or by compliance to the environmental selection forces (Aldrich et al., 1976; Hannan & Freeman, 1977; Hannan & Freeman, 1984) (for both theories also see: Lewin & Volberda, 1999; Volberda, Baden-Fuller, & Bosch, 2001). The dynamic interplay between the firm and its environment results in what the firm is, e.g. which resources and capabilities are possessed, which experience is available, and what the market share and profitability rates are. These dynamics influence offshoring behavior, its drivers and performance and might cause differences between SMEs and large companies. There is little evidence on different types of drivers that influence offshoring behavior. In the literature, particularly cost drivers (Farrell, 2005) and human capital related motives, i.e. access to labor resources (e.g. Lewin & Peeters, 2006), are mentioned. So far, different motives have been recognized, but are not dealt with simultaneously. This study aims to provide an integrated overview of both cost and resource drivers for offshoring and also investigates the importance of entrepreneurial drivers. Offshoring might not only enable to do existing activities cheaper and in better way, but also to explore new markets, to grow and to internationalize by which differentiation advantages can be realized. The drivers of offshoring influence a firm s offshoring behavior and this will in turn influence the offshoring results, a firm s offshoring performance. On both topics not much is written in literature. The ORN was one of the first to publish on the offshoring behavior extensively (Couto et al., 2006). The behavior of firms in offshoring relates to the type of functions that are offshored, the offshore location and the governance mode that is chosen to govern the overseas activities. Another measure that expresses behavior is offshoring intensity, in other words, how much of the activities is relocated. Although the offshoring drivers and behavior are important, this research aims to proceed beyond. As the EU have high ambitions with regard to the innovative performance of firms (European Commission, 2006) and the World Economic Forum (Schwab, Porter, & Lopez-Claros, 2006) classifies Western countries to be in the 3rd and highest stage of development, the innovation driven stage, investigation of the offshoring performance cannot be taken for granted. The question is whether companies will be able to profit from the offshoring strategy so that they become more innovative, get a better competitive position and realize growth. The offshoring drivers, behavior and performance will be studied in the context of SMEs. Geographical expansion is an important path for firm growth, especially for SMEs, however it is a neglected area of research (Barringer & Greening, 1998; Lu & Beamish, 2001). Also the performance effects of internationalization need to be researched further (Wiklund & Shepherd, 2005). The entrepreneurial character of SMEs might cause new internationalization models due to offshoring, which might be partly comparable to internationalization processes of new ventures (McDougall, Shane, & Oviatt, 1994). The economic impact of SMEs is large; 95 percent of the firms in Europe and US are labeled as SMEs (Karmel & Bryon, 2002). In Table 1, some more details on SMEs in Europe are presented. Recently, the European Commission placed SMEs at the centre of industrial policy making, concentrating on e.g. promotion of entrepreneurship and skills, improvement of market access, cutting red tape, improvement of SMEs growth potential (European Commission, 2006). The differences between SMEs and large companies are identified by the work of Rothwell and Dodgson (1994) which is largely based on their prior work (Rothwell, 1989; Rothwell & Dodgson, 1993). They claim large companies have material advantages, i.e. financial en technological advantages, and SMEs have behavioral advantages, i.e. entrepreneurial dynamism, internal flexibility and responsiveness to changing circumstances (see Figure 1). Examples of (dis)advantages of SMEs and large companies are summarized in Table 2. So, both types of companies have advantages and the question is whether they might be overcome, e.g. large firms might get extremely strong by adopting SME structures (Rothwell et al., 1994). Related arguments are put forward by other authors. Smaller firms are mentioned to be faced with constrained resources (Lu et al., 2001), but are thought to be closer to the market as well (Lubatkin, Simsek, Ling, & Veiga, 2006).

Abstract (NL)

In haar proefschrift maakt Roza- van Vuren duidelijk dat offshoring een multi-dimensionele strategie is met evenzoveel mogelijke voordelen: het omlaag brengen van (arbeids)kosten, het werven van personeel en het opbouwen van wereldwijde strategie├źn en het aanboren van nieuwe markten. Een duidelijke offshoring strategie kan gebruikt worden om de bedrijfsstrategie te ondersteunen en de prestaties te verhogen; de concurrentiepositie kan worden versterkt en groei worden gerealiseerd. De onderneming moet hiervoor wel de vaardigheden en vermogen voor innovatie en kennisintegratie hebben. Zowel kleine, middelgrote als grote bedrijven kunnen van deze strategie profiteren. Uit het onderzoek van Roza- van Vuren blijkt dat kleine ondernemingen voornamelijk kostenvoordelen kunnen hebben. Bij middelgrote en grote bedrijven is te zien dat offshoring positieve invloed heeft op de concurrentiepositie, als een goede balans wordt gevonden tussen het in eigen beheer houden en uitbesteden van activiteiten. Groeiende bedrijven kunnen groei versnellen door de offshoring strategie waarin kernactiviteiten verplaatst worden, er een vermogen is om kennis te integreren en als nieuwe markten worden aangeboord.

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